When DP World was vying to build a fourth container terminal
at Mumbai's main port this year, the Dubai-owned giant made what it thought was
a solid bid, proposing to share one-fifth of the terminal's income with the
Then a rival came along with a bid that beat all-comers,
offering to hand over 51 percent of the port's takings to New Delhi to secure
the project estimated to cost Rs67bn ($1.4bn).
Such generous terms are part of an emerging pattern of
companies making ambitious - some say unrealistic - bids in a race to cash in
on a massive push by Prime Minister Manmohan Singh's government to lure private
funding into infrastructure.
"The bid competitiveness is increasing to the extent
that the projects will become unviable," said Devang Mankodi, finance
director for South Asia at DP World.
"There is a lot of hype about India's growth story and
probably that is pushing some of the entrepreneurs to bid aggressively,"
he said. "No one wants to miss the bus."
PSA International, the Singapore state company that is the
preferred bidder for the Mumbai port deal, declined comment.
While India hopes that half its targeted $1 trillion in
infrastructure spending over five years is privately built, attractive projects
are scarce, making for fierce bidding.
That means the government may get an attractive deal in the
near-term, but it puts heavy pressure on companies and poses a longer term risk
if such projects are delayed or derailed due to over-optimistic assumptions on
costs or revenue.
Winning bids can sometimes be ten times the second place
offer, said S Nandakumar, a sector specialist at Fitch Ratings. Some projects
attract dozens of bids.
Such aggression has prompted major Indian firms such as
Reliance Infrastructure , owned by tycoon Anil Ambani, to focus on bigger
projects such as expressways.
"In small projects the competition intensity is
completely crazy," said Lalit Jalan, chief executive of Reliance.
"So we will focus on the large projects where we will
have fewer and more rational competitors," said Jalan, whose company built
a slick high-speed rail link to Delhi airport, the first of its kind in India.
Strapped for cash, New Delhi is pushing a model known as
build-operate-transfer (BOT). Firms bid to build a road or a metro and operate
it for a fixed period, collecting toll or ticket fares before handing it over
to the government.
To win, bidders compete to maximise the government's share
of revenue or minimise the contribution New Delhi must cough up to ensure
projects are viable.
"Today you have four or five players who are
aggressively fighting for a project. So basically they have no choice but to
try and increase the financial revenue share... as high as they can to win the
project," DP's Mankodi said.
"The risk associated with that is that once the long
term sustainability of the project is being tested, you will have issues,"
The risk of that happening hasn't deterred a slew of
companies pitching for infrastructure projects, however.
Article continues on